Chart: Smart Sensex catches problems of realtors in India

Despite sales having increasing marginally over the last four quarters, revenues of the top 25 realty companies declined 9.3 percent in the fourth quarter of financial year 2011-12 (FY12) because of low sales offtake due to rising input prices, higher interest rates and higher mortgage rates, said property research firm Knight Frank in its latest report today.

Poor performance by realty companies is reflected not only in their profitability but also in their share price indicating the lack of investor interest.

The Realty Index on the Bombay Stock Exchange (BSE) has dropped by more than half the Sensex fall, i.e. 26 percent during the last one year compared to a 10 percent fall in the Sensex in the same period.

Another report by broking house Jefferies says that property volume has declined by 32 percent year-on-year. The demand for more capital appreciation in the wake of rising prices coupled with the home loan rate hike has dampened the buying spirit and propelled demand for rental property in India.

Jefferies expects weakness in the sector to continue throughout the year, although the biggest worry is rising inventory.

Sensex vs BSE Realty

Profitability has declined too

In order to bring back the enthusiasm of the investor community into the sector, real estate companies will have to focus on factors such as improving cash flow position, lowering inventory, reducing debt and increasing profit margins, said the report. Despite the slow rise in sales in the last one year, property prices till date have been rising modestly in most of the cities. Yesterday (26 June), a Firstpost story pointed out that between Q4 of 2010-11 and Q4 of 2011-12, property prices in the National Capital Region (NCR) have increased by 33 percent and in the Mumbai Metropolitan Region (MMR) by 17 percent, but demand has approximately fallen by 40 percent in the same period.

"Though both Delhi NCR & Mumbai are witnessing large scale real estate development, the quantum of available, ready-to-move-in apartments (inventory) is very limited", Rohit Kumar, Head of Research, DTZ India, told Firstpost. A large portion of upcoming supply in Mumbai includes under construction and proposed developments, which have timelines of two to three years for completion. As a result, ready, unsold apartments are lower as compared to the overall upcoming supply. As a result, even as absorption of residential units has moderated in the city, the prices have not witnessed any correction, he explained.

Developers are not reducing prices for another reason. "From the developer's perspective if they offer upfront discounts or a reduction in prices, they will have to sell the entire project at the same rate rather than being able to sell only a few houses at a discounted price, that too only through group selling schemes, etc," Kumar told Firstpost.

Increasing production cost is also cited as a reason not to decrease prices. The developer sells a project in phases that enables him to extract maximum profit. From the sales cycle, one can clearly make out that developers still have fair scope of reducing the prices and yet be profitable. However, so far that has not happened.

It is clear that unreasonably high prices, focus on luxury projects, poor disclosures, archaic land laws, nexus with politicians, flouting rules and corruption are some of the main problems of the real estate sector in India. The only thing that will make homes affordable is transparency.

This is why Deepak Parekh, chairman of HDFC, has time and again asserted that the absence of a regulator is the root cause of corruption, anxiety and malpractice. But since policymakers themselves have vested interests in real estate in India, one should not be surprised if no decision is made on this in the medium term. Until the real estate sector gets a regulator it will not be accountable to consumers and will continue to by synonymous with black money.

The only thing that will make homes affordable is the government's will to reform this sector, but that seems highly unlikely- at least for the time being.